Royal Dutch Shell will slash up to $22bn from the value of its assets as the oil major warned coronavirus will deal a lasting blow to demand for energy products and the global economy.
The Anglo-Dutch group cut its oil and gas price outlook on Tuesday as it vowed to “adapt to ensure the business remains resilient”.
The company said as a result of the lower prices, it would record post-tax, non-cash impairment charges in the range of $15bn to $22bn in the second quarter. Its shares dropped around 1.5 per cent on Tuesday.
Shell’s move follows a similar announcement by BP this month, indicating growing awareness among executives at the biggest energy companies that tens of billions of dollars worth of oil, gas and refining assets could be rendered economically unviable.
Shell, like the wider energy industry, has been rocked by the pandemic. It cut its dividend for the first time since the second world war just as its earnings fell by half amid a collapse in energy demand and prices.
Energy executives and analysts increasingly believe that not only will the pandemic stall demand for oil and gas for a prolonged period, but the virus will also accelerate the global shift towards cleaner fuels.
Shell announced plans in April to become a net-zero emissions energy business and is undertaking a review of its organisational structure in light of its new ambitions.
Shell said on Tuesday it expected Brent crude prices in 2022 at $50 a barrel versus $60 a barrel it had initially expected and Henry Hub US gas prices at $2.5 per million British thermal units, down from $3.
After 2023, it expects long-term oil prices at $60 and gas at $3, in line with prior expectations.
Shell’s gas business, in which it has invested heavily following the $53bn deal for BG Group in 2016, will take the biggest impairment hit at $8bn to $9bn. Its oil exploration and production business will see charges of $4bn to $6bn, while impairments in its products and refining business will tally $3bn to $7bn.
The impairments are expected to increase gearing — defined by Shell as net debt as a percentage of total capital — by 3 per cent.
Chief executive Ben van Beurden told reporters in April the coronavirus cash crunch was forcing the company to balance short-term financial needs with long-term goals.
In addition to slashing the dividend by two-thirds, it has also suspended its share buyback programme and dramatically reduced capital expenditure and operating costs, while issuing new debt.
Shell, which will release its second-quarter results on July 30, has previously said for every $10 a barrel movement in Brent crude, cash flows are dented by $6bn.